RR Survey: Insights on Independents

By their nature, independent brokers have businesses and backgrounds of all shapes and sizes, but most have one thing in common: They cherish their freedom, according to Registered Representative's exclusive Independent Contractors Study. Slightly more than 50% specifically cite freedom or independence as what they like best about working as an indie. Others say building a practice and equity (15%),

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By their nature, independent brokers have businesses and backgrounds of all shapes and sizes, but most have one thing in common: They cherish their freedom, according to Registered Representative's exclusive Independent Contractors Study.

Slightly more than 50% specifically cite freedom or independence as what they like best about working as an indie.

Others say building a practice and equity (15%), ability to serve clients without interference (12%) or their ability to choose the products they want (15%) are the key advantages of being independent. Only 12% mention payout as what they like most, while 4% cite other choice features.

The survey includes data collected from 299 respondents who are principals in offices affiliated with independent broker/dealers. Here's a look at their characteristics as well as the basics of the businesses they run.

Who They Are

The average respondent has been an investment professional for 14 years, nine of these as an independent contractor. Respondents were mainly male, at 83%, and were an average age of 47.

Geographically speaking, most respondents are from the East Coast, at 40%, another 23% are from mountain or Pacific states, 24% are from the northern central region of the country while 12% are from the southern central area.

More than eight in 10 respondents have some college in their educational background.

Forty-two percent graduated college, 18% did postgraduate study without getting a degree and 23% have a postgraduate degree. Only 3% are high school graduates or less, 12% attended college without earning a degree and 2% didn't answer the question.

The work backgrounds of the independent respondents also vary.

More than a quarter (27%) worked for a wirehouse immediately prior to becoming an independent and 20% were from regional or local brokerage firms. Another 26% were from allied fields such as an insurance company, accounting firm or discount brokerage. Meanwhile, 21% are new to the industry, either coming from another field or starting as their first job. And 6% had other answers.

Nearly nine in 10 respondents are Series 7 registered (87%). The next most popular licenses are for insurance products (62%), and life and disability (54%). In addition, 45% report they hold a Series 65, or registered investment adviser license.

What They Generate

The average personal production of respondents is $277,000 over the past 12 months. However, large producers might skew this average higher since more than half bring in less than $150,000.

The size of the firm respondents establish also plays a role in the production they generate. Reps who work at larger offices have a higher personal annual production. For example, those with one employee in the office have an average gross production of $211,000, while those with six or more employees in their office have an average personal production of $329,000.

Production also increases with experience. Those who have been in the industry 20 or more years produce an average of $388,000, compared with the $113,000 brought in by those in the industry five years or less.

Commissions account for more than three-fourths of office revenue for independent brokers. The average breaks down as 77% commissions, 19% asset-based fees and 4% hourly fees/fee for service. However, 86% of respondents see the fee-based business area growing.

Meanwhile, mutual funds make up the largest percentage of respondents' business, at 42%. General securities represent 19%, annuities 16%, managed accounts 10%, life insurance 9% and other products 4%.

A respondent's business mix changes based on his background. For example, former wirehouse reps are more apt to sell securities. By the same token, people from the insurance field are more likely to offer insurance and annuities.

Who's on Staff, What it Costs

Independents have the ability to set up their offices in any manner they see fit. And the survey shows that respondents take advantage of that freedom, but favor keeping their practices small.

Among those who answered the question about total employees, the largest group (29%) says their office includes just two to three people. Another 21% say they are the only employee. At the opposite end of the scale, 15% have more than 10, 18% have six to 10 and 17% have four to five on staff.

Firms with two to five staff members typically have one principal, one administrative assistant and another producer. Meanwhile, offices with six or more staff members have multiple principals, multiple other producers, multiple administrative assistants, a marketing person and a computer operator.

The principals in most offices receive nearly half of every dollar in gross revenue, at 46%. Expenses for staff, rent and other costs account for 26%, while the broker/dealer receives 28%. The survey did not break down dealer charges like ticket charges or technology costs.

However, the percentage of revenue that goes to principals increases with experience. Those in the industry 20 or more years receive 52% of revenue and 22% goes to the broker/dealer. Respondents with less than five years experience receive an average of 40% and 39% goes to the broker/dealer.

One-person offices bring in more for the principal at 56%, while offices that generate $1 million or more in gross pay less to the principal at 43%.

The logistics of transferring accounts and operations work tangled up many a rep making a transition to independent status, according to the survey.

The next biggest struggle was to learn new systems. Many respondents couldn't choose a single difficulty, saying they found multiple factors troubling during their transition. However, getting clients to move was the least problematic for respondents.

Now after having operated as an independent, some reps complain about certain aspects of the job. Among those who answered what they like least, most are unhappy about the workload as well as support problems.

Others mention they are uneasy about the financial risks and expenses associated with their chosen work arrangement. Finally, another group dislikes the isolation and loneliness of being an independent.

Methodology: A 3-page survey was mailed in November 2000 to 1,000 independent brokers who subscribe to Registered Representative. A follow-up mailing was sent in December.

A total of 299 usable surveys were received for a response rate of 30%. The answer base on the charts provided is 299 unless noted.

Data collection and analysis were conducted by Intertec Corporate Planning and Research in Atlanta.

Registered Representative would like to thank the independent brokers who participated.

Remembering back to their process of selecting a broker/dealer, respondents declare that the firm's service overall was the most important factor. They also say fair fees and compliance were essential considerations.

Now after working with their chosen broker/dealer, respondents rated how well the firm is performing in key areas. For the most part, firms are doing well in service and compliance. Nearly two-thirds give those factors a rating of four or five on a five-point scale, where one is not satisfied and five is very satisfied.

However, reps are less happy with their firm's marketing support, transition support and managed account programs.

Lots of respondents have lots of reasons for becoming an independent contractor. In fact, three-quarters say that several factors drove them that direction (76%).

The survey allowed reps to give multiple responses.

About 56% say pay concerns contributed to their transition and a similar number sought greater independent product selection. A personal situation motivated just over half at 53%, and 52% were seeking a different work environment in general. Ethical reasons drove 42%, 38% wanted better control over expenses and 33% wanted to create equity.

Respondents who came from wirehouses were more likely to have made the transition for ethical reasons at 61%. These reps explain they were often encouraged to place clients into proprietary products not always in the best interest of the client.

And respondents with high personal production of $250,000 or more were most likely (62%) to indicate that greater independent product selection contributed to their move.

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